Does your Development client have a Plan B?Posted by oblixcapital on Aug 27 2019
Andy Reid highlights the need for alternative plans
The average time taken to sell a residential property has increased from 16 weeks in Spring 2017, when RICS started recording the data, to 19 weeks earlier this year. This is the longest period since these records began and represents a rise of nearly 19% in just two years.
At the same time, the July Rightmove House Price Index has reported that the proportion of sellers already on the market who are reducing their asking prices is the highest at this time of year since 2011, indicating initial over-optimism on price.
These two insights from the market indicate that properties are taking longer to sell and often achieving well-under vendors’ asking price. It’s a challenging combination of factors for developers, so what are their options?
There are still opportunities to make good returns on developments, but a well-planned exit is key. If a developer’s only strategy for a scheme is a fast sale on all of their units, they could come unstuck.
It can be common for prime units on a development to sell quickly, but other properties to be harder to sell. The risk here is that a developer could reach the agreed term on their development finance and be subject to default interest in they are unable to redeem the loan. And this can be very expensive.
It is therefore prudent that a developer always has a plan B and developers who find themselves in this situation have a number of choices.
One option is to refinance the scheme onto term loans and retain the properties to rent out themselves. Not every development will be suitable for letting, depending on area and property type and so this potential route should be a consideration at the outset of a scheme as it may influence the way in which the properties are developed.
Another, and arguably quicker and easier option, is that developers can buy themselves extra time to sell the remaining units and hold out for a price they believe they can achieve, with a development exit bridge. This product can be used to pay off a development facility, is usually available at rates that are cheaper than development finance and considerably cheaper than the default rates on development loans.
At Oblix Capital we have recognised the growing importance of development exit bridging loans and so we offer them alongside our development finance as part of our end-to-end real estate proposition.
When it comes to working with developer clients in the current environment, you should always stress the importance of a plan B exit strategy but don’t forget that there are options for those clients who need extra time at the end of the agreed term of their development finance, and a development exit bridging loan can provide the flexibility required to create an alternative route.